From the Farm: The kiwi dollar paradox

By Jonathan Underhill

The Ministry of Primary Industries’ half-year situation and outlook report has a map of the world coloured to reflect changes in the International Monetary Fund’s economic growth forecasts between April and October. Most of the map is orange to signify a reduction of up to 1 percentage point.

That should be a signal of weaker global demand for New Zealand’s primary products – a bad thing for the economy, and surely the currency. But the MPI report lifts its assumption for the kiwi dollar between now and the fourth quarter of 2014 to an average 80.70 US cents, from the 78.80 cent used in June.

The kiwi is well above that today, at 83.88 cents. In the past 24 hours it has broken out of a trading range of 79.09 cents to 83.54 cents that contained the currency since late July.

As it breaks through key resistance levels, traders see it rising above 85 cents. Certainly that’s the view of New Zealand companies. This week’s ASB Institutional Kiwi Dollar Barometer, which polls importers and exporters, has the kiwi peaking at 86.2 cents in June next year.

Importers, who have more spending power when the local currency rises, are more bullish, seeing the peak at 86.6 cents.

The risks are to the upside. The Federal Open Market Committee will announce the results of its two-day policy meeting early on Thursday our time. US interest rates are expected to be kept near zero but there’s a large body in the financial markets who expect the Fed to unveil further quantitative easing – likely to be outright buying of Treasury bonds and mortgage-backed securities.

That means printing more money, devaluing the greenback. If the Fed does head for the printing press and announces a goodly chuck of bond buying – say more than US$40 billion a month – the New Zealand dollar will be one of the biggest recipients. The UK is doing similar – it is the action du jour for major central banks.

Green Party co-leader Russel Norman hasn’t gained any traction on his suggestion the Reserve Bank follow suit and print more kiwi dollars. And Reserve Bank governor Graeme Wheeler is regarded as a monetary policy hawk, all but ruling out a cut to New Zealand interest rates last week and looking at resurgent inflationary pressures on the horizon.

Later this month, Japan will hold elections, with a recent poll by the Mainichi newspaper predicting the main opposition Liberal Democratic Party projected to win almost 300 of the 480 seats in the lower house. Add in support for its ally, the New Komeito party, and it could have a two-thirds majority, the Wall Street Journal reports.

The LDP has vowed to do whatever it takes to weaken the yen and provide some relief to Japan’s big name brand exporters and speculation has stretched to it pushing for negative interest rates if needed. As one strategist said this week, just watch the carry trade come roaring back as Japanese housewives are drawn to relatively more attractive yields available in New Zealand dollars.

Short-term prospects for New Zealand’s commodity exports have been “adversely affected” by the high currency and deterioration in global economic conditions since the MPI’s June forecasts, it said in its report today.

The ministry trimmed its forecast for total primary sector export revenue by 3 percent to $27.5 billion for 2012/13.

Dairy export revenue is expected to fall 8.1 percent to $12.6 billion in the year ending June 30, 2013. Global milk production will be slowed by higher feed costs in the US and the EU but “economic uncertainty in the developed world and weaker global demand growth from emerging markets are likely to constrain future increases in in international dairy prices,” the MPI says.

Lamb export revenue is forecast to drop 17 percent to $1.91 billion in the June year while for beef, export revenue may rise marginally to $2.03 billion. Wool revenue is forecast to tumble 23 percent to $580 million.

The volumes of New Zealand dollars traded in global forex markets is out of all proportion to the amounts needed to account for the nation’s trade, forming part of the wash of hot money that flows through the biggest currency hubs like London.

The curse of a high kiwi dollar remains and I haven’t seen any serious proposals to weaken it short of starting a revolution in financial markets.



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